No tears for Cyprus in Brussels and Moscow

Handshake between Nicos Anastasiades, President of Cyprus and José Manuel Barroso, President of the European Commission. Barroso, together with other centre-right politicians went to Cyprus for the European People’s Party (EPP) Summit on 11/1/2013, to help Anastasiades get elected. (EC Audiovisual Services)

One after the other Eurozone’s major players draw their red lines towards Cyprus, after the country’s Parliament rejected unanimously the agreement struck between the Nicosia government and the Eurogroup in the early hours of Saturday morning 16 March. The agreement was supposed to provide the Cypriot authorities with €5.8 billion from a haircut of 6.75% to 9.9% on all bank deposits in the island’s banks. The money was supposed to be used together with a loan of €10bn from the troika of EU-ECB-IMF to recapitalise the country’s failing banks and save the country from bankruptcy. The troika now says that the plan B the Cyprus government proposed instead of the above agreement is not acceptable, because it contains €4.5bn in loans from the country’s pension funds. In such an eventuality the Republic’s sovereign debt becomes unsustainable.

The initial package that the island’s lawmakers disapproved provided for a 6.75% haircut on bank accounts bellow the benchmark of €100,000 and a 9.9% levy on account balances above that. As that news broke out last weekend the Cypriot population took it to the streets. The whole thing resulted to a unanimous rejection of the deal in Parliament on Tuesday. Now the Cypriot government is looking around to find €5.8bn in non-borrowed money in order to keep the country’s debt at sustainable levels around 100% of GDP, while trying to restore the country’s banking system in a viable position by recapitalising it with €16-17bn using also the troika’s loan of around €10bn as mentioned above.

In view of the continuing stalemate the Central Bank of Cyprus said yesterday night that the island’s banking sector will remain closed until next Tuesday that is ten days in a row. In the meantime the Parliament is to convene today with two draft bills on the agenda, both of them though to introduce rules in the event of possible banking sector dissolution. The first bill is to install controls on capital outflows and the second will address the procedures to deal with a potential insolvency of a bank.

Looking around for cash means also Moscow. Given that the island’s banking system is used traditionally by Russian wealthy people to do their business abroad, there is at least €20bn of Russian money parked in Cypriot banks, plus more of it in other financial instruments. In any case Russia has been a structural factor in the Cyprus banking system brilliant expansion over the past twenty years.

Unfortunately the two major Cypriot banks, Laiki and Cyprus Bank have a killing exposure to Greek values. Firstly they were loaded with Greek sovereign bonds, which lost 53.5% of their nominal value in March 2012, when Greece imposed a haircut on all private holders of its government bonds. Secondly, those two Cypriot banks had an extraordinary development in Greece, mainly in the real estate mortgage market, which also is now in ruins. Their losses in those two fronts swept out their capital leaving them in the air.

In view of this, the country asked formally for Eurozone’s financial help in July 2012. However the until three weeks ago government of the previous President Dimitris Christofias, leader of the island’s communist party, never agreed the terms for a help package with the usual troika of EU-ECB-IMF, which undertakes the task of bailing out the Eurozone countries in financial trouble.

How the island’s banking system was maintained afloat all those months is a miracle. Despite the fact that it was known that the two overgrown major banks were almost out of capital, there was no bank run. In any case the new government of President Nikos Anastasiades, a right-winger veteran, who w0n the election of Sunday 24 February, had as main task to conclude a financial deal with the troika. The country’s banking system equilibrium was becoming dangerously unstable.

Communist or right-winger however it made no difference as far as relations of Cyprus with Russia are concerned. The new minister of Finance Michalis Sarris, probably the architect of the rejected by the Nicosia Parliament deal, went to Moscow early on Wednesday and stayed there, even after the Russian government issued an announcement saying is not helping Cyprus out of its Eurozone made troubles.

Sarris and Anastasiades must have been the main forces behind the proposal of giving a haircut to all bank deposits even from the first euro. Their idea was to reduce to the lowest possible level the tax to be imposed on account balances above the €100,000 benchmark. Understandably the Russians must have been the bulk of foreign customers to Cyprus banks, holding accounts with balances above €100,000. If there was no levy on all accounts those fat ones would have been charged much more than 9.9%.

Actually Sarris and Anastasiades must have staged a real fight to convince the Eurogroup and the IMF to let Nicosia tax all bank accounts. Their aim was to protect the foreign customers, mainly Russians, holding the fat accounts. On the other side of the fence the EU Commission, the Berlin government and the IMF wanted to make the Russians pay dearly to salvage their own money. During the past months eight o’clock news and popular press all over Germany, were full of reports that the German taxpayers could be asked to salvage with their taxes the banks accounts of Russian oligarchs in Cyprus banks. Given that, the Berlin government wanted blood from the fat bank accounts in Cyprus. It was exactly what Anastasiades and Sarris wanted to avoid.

Seemingly the 9.9% levy is considered as blood in Moscow but taken as just scratches in Berlin. After the Cypriot Parliamentarians rejection of the package agreed the troika is taking even a tougher position. The cold language in a relevant Commission’s announcement yesterday tells a lot. The announcement says plainly that “It is now for the Cypriot authorities to present an alternative scenario respecting the debt sustainability criteria and corresponding financing parameters”.